Instapaper’s Arment: Seek Money From Customers, Not VCs

Marco Arment, the former CTO of the Tumblr blog platform, is best known these days for his time-shifting reading app Instapaper. But he could start a side-job as a financial advisor to start-ups. His motto: Get the money from your customers, not investors.

Arment’s more traditional take is built largely on the idea that if he puts out a good product, there’s no shame in asking customers to pay for it. And the more they pay, the less he needs to rely on outside investors. Arment said many developers are of the mindset that they need to amass a huge number of eyeballs through free services. But they don’t focus enough on building a solid product that can command loyalty and payment from consumers, and instead try to gain profitability through advertising and turning to outside venture capital.

By contrast, Arment says his efforts to monetize Instapaper have been successful because he was able to leverage the hard work he put into his paid versions and the good will he’s gotten back from consumers. And that has allowed him to avoid outside funding, something he plans on doing for the forseeable future.

Don’t Take Funding if You Don’t Need It

“If a service can be profitable and breakeven without VC money, you don’t need to take it,” Arment told me in an interview. “There’s no reason for developers to get a lot of users without charging. There’s another path. My goal is to spread that message: Charge for something and make more than you spend.”

Arment launched Instapaper as a free website in January 2008 and became profitable later that fall when he first began selling a paid iPhone (s aapl) app alongside a free version. He’s been profitable ever since. Arment won’t disclose his revenue, but he said he can cover his expenses and can afford to hire a couple more people if he needed. He left his Tumblr job in September to devote himself to Instapaper.

Though Arment maintains a free iPhone app, he said the focus of the company has been on the paid versions which are updated first (a new update is expected in the next month or so). He has yet to release a free iPad version and has only gotten three emails about the lack of it. Most seem happy to pay for the $5 iPad version. Between 25 and 33 percent of people pay for the $5 paid iPhone version. In fact, as an experiment, he pulled the free iPhone app from the app store for a week a little while back and found that only one person emailed. Sales of the paid version didn’t go up, but they didn’t go down either, he said.

“The free version isn’t really competing as much as I expected with the paid version; a lot of people go straight to the paid version,” he said. “It was only a week but the people who were going to the free version would not have gone to the paid version.”

Let Users Thank You by Paying You

That’s what’s allowed Arment to really focus on the paid segment. In fact, he still questions the value of the free version at times because it can leave a more negative impression for users with its limited set of features. Arment said his paying users have surprised him with their support. He started a $1 a month subscription plan in October that didn’t actually offer much in the way of extra features. It was more of a way to let users show their support for Instapaper. He said the response was overwhelmingly positive.

“That was a huge surprise to me how well it’s doing given there’s no real incentive to do it besides good will. But it ends up that good will is powerful,” Arment said. “It shows that people will pay for something they like because they want to ensure its future.”

Arment is testing the theory again with a new API that leverages his subscription plan. For developers who want to build apps with Instapaper integration, Arment said last month he will require their users to subscribe to Instapaper. Again, the response has been very positive, said Arment. Two hundred developers have applied to get access to the API. All this money-making has allowed Arment to sidestep venture capital money. He has had repeated offers, but Arment said accepting VC funding is akin to taking on a new boss, and the act of raising and maintaining money is a full-time job, he said.

Venture Capital Is Like Having Another Boss

“If you can go without funding, you can be a one- or two-person shop without a whole level of bosses,” he said. “You’re not worried about getting more money and getting diluted anymore.”

Arment’s approach doesn’t work for everyone. He was fortunate to be able to this as a side job and build it up while at Tumblr. And he acknowledges that the lack of funding could be a problem if he wanted to build a staff quickly. But he believes his experience shows that a more old-school approach to building a business and developing a following with consumers is a viable one for entrepreneurs that should be explored more. He may not the biggest company, but he can be a profitable one for a while.

“I don’t need the entire market,” Arment said. “I can get five percent of the market and be rich.”

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